All-Important Discovery

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I’m glad to see I’m not the only one who was initially puzzled by the scale of the decline in Goldman Sachs’ stock, since the SEC legal complaint didn’t seem to me, on its face, to portend doom for what’s a very profitable firm. But Yves Smith and Tom Adams point out that all you really need to seriously injure a firm in a situation like this is a case strong enough to withstand summary judgment which forces more information into the public record:

And as other have noted, the odds are high that even if Goldman wins (or more likely, settles), it comes out the loser. When Procter & Gamble and other large companies sued Bankers Trust over losses they sustained on derivatives trades gone bad, many observers argued they didn’t have much of a case. Procter in particular had a sophisticated treasury operation; how could experienced market players claim they had been duped? The litigation appeared to be an effort to stem losses on bad bets.

But when P&G obtained access to taped conversations of BT staff discussing their and others’ trades, public opinion shifted dramatically. The bank’s posture was openly predatory (the most infamous quote was “Funny business, you know? Lure people into that calm and then just totally fuck ‘em.”). BT never recovered from the scandal, but it took a second run-in with the authorities (failing to turn abandoned client assets over to the state) that led to the bank’s sale to Deutsche Bank.

To be sure, the fact that that happened once doesn’t mean it’ll happen again. Maybe further discovery will reveal nothing of interest. Maybe. But maybe not. So that all makes sense to me now. It’s also worth noting in this regard that the macho culture of the banking world tends to ill-serve firms that find themselves on the wrong end of the legal microscope. Whatever the “lure people into that calm” guy was trying to express he surely could have conveyed in some more circumspect manner, had there been a general culture of caution and discretion.